WASHINGTON (October 15, 1999) – Despite the growth in Internet fraud, most bogus investment schemes are still sold the old-fashioned way—over the telephone. State securities regulators say the best protection is an answering machine to screen calls.

But telemarketing is changing, in response to technology, the increased use of answering machines and voice mail and repeated crackdowns by regulators. The big boiler rooms of yesterday are largely gone, according to Bill McDonald, assistant commissioner-enforcement of the California Department of Corporations. They’ve been replaced by smaller “rip and tear” operations—telemarketers who work from home or from hotel rooms, using cell phones and temporary post office boxes to make it harder for regulators to trace and catch them.

Embracing new technology, telemarketers are going “multi-channel,” using web sites, direct mail and infomercials to solicit potential customers and get victims to initially contact them. But the sale is usually “closed” over the phone. “The hard sell is hard to do with a computer screen,” says McDonald.

Telemarketing hotbeds include California, Florida, Canada and, increasingly, the Caribbean. “All you need is telephone capability,” says Anita O’Riordan, a San Diego-based consultant on telemarketing fraud and economic crime. Adds California’s McDonald: “With sophisticated 800 number technology, telemarketers can cross borders or go offshore to make investigation and prosecution more difficult. They can as easily be in Costa Rica as in Costa Mesa, Calif.”

Older Americans are especially vulnerable to con artists pushing fraudulent or high-risk investments such as promissory notes, prime bank notes and viatical settlements. All of these promise higher rates of return than banks or money market funds. Seniors make tempting targets because they tend to have money, are often home during the day to answer the telephone, and are polite to cold callers. In addition, regulators say, many older Americans are lonely and therefore vulnerable to scammers who befriend them to gain their trust.

Unfortunately, says O’Riordan, many seniors don’t have answering machines or voice mail. “They don’t know how to use them and they may be afraid of losing calls.” She suggests baby boomers worried about their parents getting scammed give them an answering machine and make sure they use it. “The longer the telemarketer can keep the victim on the phone the better likelihood of a sale. Anything to put distance and time between the fraudulent telemarketer and the targeted victim the better.”

The psychology of telemarketing fraud is complex, says Bradley Skolnik, Indiana Securities Commissioner and president of the North American Securities Administrators Association (NASAA), which represents state securities cops. “Victims can get sucked into the scam and let their guard down. Then they’re afraid to tell relatives, afraid they’ll say ‘How could you be so stupid? You obviously can’t handle your money, so we need to take over.’ We shouldn’t blame the victims; we should blame the criminals. If you get mugged, nobody blames you for being a victim. So, we shouldn’t blame people who get mugged over the phone.”

Regulators are fighting telemarketing fraud in a variety of ways, including enforcement and education. The California Department of Corporations, for example, is working with a task force of federal and local law enforcement agencies to crack down on large boiler room operations in southern California. With the help of a grant from the Bureau of Justice Assistance of the U.S. Department of Justice, the task force is creating a database of targets and investigative information and plans to bring coordinated raids and enforcement actions. It also plans to organize “reverse boiler rooms,” where regulators call potential victims, whose names are gleaned from “mooch” lists seized in boiler room raids, to warn them about the risks of telemarketing fraud.

For more information on telemarketing fraud, visit the NASAA web site (www.nasaa.org) and look under “Investor Education” for the “Cold Calling Alert.”

Tips to follow if a cold caller gets you on the line:

Hang up on aggressive cold callers.

Beware of anyone promising you a “once-in-a-lifetime” opportunity of “guaranteed” returns.